How Rising Interest Rates Are Reshaping LIHTC Deal Structures

Equity Remains Critical, but the Market Has Changed

While LIHTC equity continues to be one of the most dependable sources of affordable housing capital, the economics of that equity have shifted significantly over the past year.

Pricing across many LIHTC markets has declined materially and remains volatile depending on geography, investor appetite, Community Reinvestment Act (CRA) demand, and overall market conditions. In California, for example, pricing that was commonly in the 90-cent range a year ago is now often falling in the mid-70s to low-80s.

That reduction in pricing has had a direct impact on deal structures. Lower equity pricing means less capital raised per dollar of credits, forcing developers to identify additional financing sources, increase soft funding, defer fees, or restructure transactions to maintain feasibility.

At the same time, CRA considerations are playing a larger role in how investors evaluate and price transactions. Many institutional buyers are prioritizing deals that align with targeted assessment areas and broader CRA objectives, creating stronger pricing in certain markets while leaving others with reduced competition and wider spreads.

As a result, LIHTC equity remains reliable, but it is no longer as uniform or predictable as it was in prior years. Execution now depends much more heavily on market positioning, investor relationships, and timing.

Tax Credits Are Bridging a Larger Gap

With reduced debt capacity, higher borrowing costs, and lower equity pricing, financing gaps have become even more pronounced across the market.

Increasingly, those gaps are being addressed through layered tax credit strategies and additional subsidy sources. Developers are combining federal LIHTC with state credits, leveraging soft financing programs, and restructuring transactions to maximize available basis and investor interest.

In many cases, tax credits are not simply part of the solution. They are the primary driver holding the capital stack together in an environment where traditional financing sources alone are no longer sufficient.

However, the amount of capital generated by those credits is less certain than it was previously due to pricing volatility and shifting investor demand. That dynamic has made execution more complex and more dependent on identifying the right equity partners early in the process.

Investors Continue to Prioritize LIHTC, but Selectively

Investor demand for LIHTC remains strong relative to many other investment alternatives, particularly because of the long-term stability of affordable housing and the continued importance of CRA compliance for financial institutions.

However, investor behavior has become more selective.

Transactions located in stronger CRA markets or tied to strategic banking priorities are generally seeing more competitive pricing and deeper investor demand. Other projects may face fewer bidders, more conservative underwriting, and longer negotiation timelines as investors evaluate market exposure and pricing risk more carefully.

This has created a more segmented LIHTC market where execution outcomes can vary significantly between otherwise similar transactions.

The Strategic Takeaway

Rising interest rates are reshaping LIHTC transactions in multiple ways, but they are also exposing how important tax credits have become to affordable housing finance.

As debt capacity declines and equity pricing becomes more volatile, developers are relying more heavily on credits to close funding gaps and stabilize projects. At the same time, CRA-driven demand is increasingly influencing where capital flows and how transactions are priced.

LIHTC remains one of the most resilient sources of capital in the market, but successful execution today requires more sophisticated structuring, stronger investor alignment, and a deeper understanding of evolving equity dynamics than in prior years.